Concern about Turkey's growing current-account deficit and the impact on the country's financial stability of this and strong short-term capital inflows will continue to make the Central Bank of Turkey's task of setting monetary policy highly challenging. Instead of raising rates, as central banks in most booming emerging markets have done, the Central Bank of Turkey cut its key interest rate, the one-week repo (repurchase) lending rate, by 50 basis points in December 2010 and by 25 basis points in mid-January 2011, to 6.25%, and aggressively hiked banks' required reserves for short-term liabilities. We think further reserve hikes may be announced if credit growth does not start to moderate but interest rates will remain on hold until after the June election and then start to rise gradually as inflation picks up. Our forecast assumes that higher reserve requirements will start to slow credit growth, which has fuelled increased spending on imported goods, but with a lag of several months. However, there is a risk that they do not succeed and the current-account deficit rises by more than we are currently forecasting, requiring much tighter monetary and/or fiscal policy in the first half of the forecast period.